VIII.

RECESSION, HYPERINFLATION &  no money available to fund new businesses

STAGFLATION
 all uncertainty limits foreign investment and
Germany (1923) trade

 money (Mark) is used as wallpaper and fuel to

the fire
Why is it hyperinflation bad?
 had hyperinflation
Govt pays bills by printing more money

Increase in money supply

 additional money = higher prices
1. ⬆ output
 trillion marks = 1 dollar
2. ⬆ prices
 Mark = useless
3. ⬆ both

Inflation
Zimbabwe
 starts when output >> pushed to capacity >>
 inflation rate -- 489 billion % prices cant rise further
Zimbabwean dollar  but policy makers continue to increase money
supply
 lost 99.9% of its value (2007-2008)
 Output is maximized ➡ more money to print
 prices doubled every 24 hours
➡ more inflation to get
 revised several hours a day
Velocity of Money
Hundred trillion dollar bill  number of times a dollar is spent per year
 largest denomination of currency ever issued  when people spend money quickly >> increase
velocity >> pushes inflation up even faster
Hyperinflation
•Vicious cycle of higher prices ➡ leads to
 when a country experiences a monthly inflation
expectation of higher prices
rate of over 50% or around 13000% yearly
inflation

 erodes wealth Hyperinflation in Germany

Worst inflation in the history  ended when the government replaced worthless
mark with new currency
1. Hungary (July 1945- August 1946)
Zimbabwe
price level = x^(3 x 10^25)
 ended hyperinflation by abandoning currency
altogether
Extreme inflation
 stabilized prices
 forces people to spend as quickly as possible
rather than save or lend  increase in real GDP
 Continuing deflation

Depression  borrowing money is a bad deal (no interest)

 real GDP falls and keeps falling for a long time  discouraged people to buy houses and cars
 discouraged businesses

Recession
Money to pay back in the future
 Downturns
➡ more buying power than money borrowed
Effects

1. high unemployment

2. falling prices Stagflation

Deep recessions (what happens?)  stagnant economy + inflation
 more workers than jobs  when output ⬇ or stagnates at the same time
 more output than demand prices ⬆

 both income and prices fall  economy could not produce much

Central banks

 can try to use expansionary monetary policy to US stagflation

speed up economy
 started in 1970
US
 rise in oil prices
Federal govt ower interest rates ➡ encourages
 death of peruvian anchovies (used for animal
businesses and consumers to take out loans
feed and fertilizers)
•change in behavior (if price ⬇️, wait for the lower Fed Govt
prices)
tried to address this by boosting money supply and
if everyone follows, spending declines >> ➡ slower cutting interest rates ➡ output could not rise much
velocity of money ➡ further price declines ➡ [because of low productivity and oil shortage ]
vicious cycle of falling prices >> expectations of lower
prices ➡ actual lower prices
Extra money
Liquidity Trap
 trigerred inflation
 worsening factor in economic downturns
Businesses
including 'The Great Depression
 expect cost to rise further

•interest rates = 0  laid off workers

 Prices keeps ⬇  put economy back to recession

•fed boost money supply again ➡ raised inflation
expectations more

Paul Volcker

 cut money supply

 raised interest rates

 ended stagflation

Hyperinflation, Deflation, Depression & Stagflation

 shows importance of understanding overall

economy

Government action/inaction

 may make things worse

People expect recession ➡ decrease spending ➡ cause

recession